The Federal Government moved to cool down the overheated housing market in some regions of the country and announced changes to housing rules. The changes, the most significant of which impact high ratio homebuyers, came into effective on October 17, 2016.

A Mortgage Rate Stress Test will now be applied to all new mortgages which are insured against default by the federal government. Mortgage insurance is commonly required when high ratio home buyers make a down payment on a property of less than 20 per cent. Under the new rules, the first time home buyer must qualify for their mortgage loan using a higher interest rate than they are actually paying. The rate is based on the posted Bank of Canada rate which tends to be 2 points higher than the interest rate posted by banks. The impetus of the change is to assure lenders that the borrower could still afford the mortgage if interest rates rise. This change means that home buyers will require 20% more income (25% more in Toronto; and 27% more in Vancouver) to purchase the same property they could have purchased before the rules changed. The Stress Test also examines whether the home buyer will spend more than 39 per cent of their income on carrying costs such as mortgage payments, taxes and heat; and assesses the total debt service, which includes all debts, does not exceed 44 per cent.

Low-ratio Mortgage Insurance Restrictions – The government will also define new rules for low-ratio mortgage insurance. Home buyers who pay more than 19.99 per cent down on their mortgage may choose to take additional insurance to limit risk (typically required by the lender). New restrictions will lower the risk faced by the government and include: the purchase price of home is less than $1 million; the amortization period is less than 25 years; the buyer credit score is 600; and the property will be owner occupied.

Primary Residence Capital Gains Exemption – There is a new reporting requirement for the Primary Residence Capital Gains Exemption. Owners will now be required to report the sale of their primary residence to Canada Revenue Agency with their annual tax filing.

The proceeds from the sale of the primary residence will remain tax-free. The new reporting requirement is aimed at foreign investors who buy and sell (flip) homes and claim the primary residence exemption for which they are not eligible.

Lender Risk Sharing – An upcoming public consultation on Lender Risk Sharing is planned by the Department of Finance Canada to explore how lenders can share some of the cost incurred by the federal government through the default of insured mortgages and align Canada with other international housing finance practices.

First-time home buyers in Ontario eligible for land transfer rebate

Effective January 1, 2017, first-time home buyers, who are permanent Ontario residents, will not pay land transfer tax on the first $368,000 of the purchase price of their home. This represents a land transfer tax rebate of $4,000, doubling the previous $2,000 rebate.

The current land transfer tax for the purchase of residential property is 0.5 per cent tax on the first $55,000; 1 per cent from $55,000 to $250,000; 1.5 per cent on amounts from $250,000 to $400,000; and 2 per cent on any amount over $400,000. The province is changing this schedule effective January 1, 2017 and will require buyers to pay 2.5 per cent on amounts over $2 million.

The province has also frozen the property tax rate on apartment buildings, taxed at double the rate of two unit properties, while it examines the impact of those tax rates on rental affordability.